Market Concentration and the Importance of Properly Defined Markets

Since the 1970s, America’s antitrust policy regime has been weakening and market power has been on the rise. High market concentration—in which fewer firms exist in a given market—is one troubling symptom and cause of market power. From 1985 to 2017, we saw an increase in the annual number of mergers from 2,308 to 15,361. The failure of antitrust policy in the U.S. has led to an increase in market concentration in 75% of industries from 1997 to 2012 alone. High market concentration deters healthy competition, leading to low investment by companies who don’t need to keep up with competitors in R&D. It can also lead to stagnant wages through labor market monopsony—where employers have the discretion to set wages and working conditions on their own terms, without fearing that their workers could check their power by finding another job. High market concentration makes it nearly impossible for small businesses to compete or for new businesses to enter the market because of the increased cost of entry. Overall, this trend leads to rising inequality and a decline in labor mobility and entrepreneurship.